<B>The HQ Effect</B>

Rafael Pampillón. Professor. Instituto de Empresa

21 April 2004

Does it matter where a company has its head office? What economic difference does it make to the nation playing host to production facilities or headquarters?

Every car and truck manufacturer with production plants in Spain has its headquarters in another country. It is in those nations that decisions are made which affect Spain’s industrial fabric - at least so far as the automobile sector is concerned. It does not matter where the cars are produced, or the language the assembly-line workers speak. The most important manifestation of a company’s nationality is still the location of its head office.

Ten years ago, Oscar Fanjul wrote an article called, 'Is the existence of industrial firms in Spain really essential?' In it, he highlighted implications of the head office. He argued that a whole range of high added-value activities takes place around them, more advanced technologies are used and a network of highly-paid jobs and services is created there. From an image standpoint, our society considers these extremely desirable.

Among other activities, we could mention those related to finance, marketing, law, research, design and development, engineering and executive policy. Hardly any corporations set up their principal research centers abroad and production activities at their HQ. It is near their head offices that firms can collaborate and support universities and non-business research centers. Consider Nokia or Siemens: what would happen to many companies and institutions in Finland and Germany if these headquarters were transferred elsewhere?

Value-added activities

The recent decision to transfer part of production of the SEAT Ibiza from Martorell to Bratislava was taken in Germany. On the other hand, it would prove much more difficult to transfer Volkswagen production out of Germany. This is because the influence that government (both central and local) and trade unions (sometimes major shareholders through their pension funds) exercise over firms is fundamentally felt where the head office is located. This influence turns out to be relevant when determining location and the volumes involved in the companies’ investment and expansion plans.

But the importance of a company’s having a headquarters in Spain - particularly an industrial firm - really centers around one fact: an industry is more than just nuts and bolts. It is true that a significant number of activities is intrinsically of little added value (for example, car assembly). Yet it is even truer that certain procedures and requirements exist, prior to those activities, which are of great added value (design of assembly lines or development of materials), and that added value impacts both on companies and their suppliers. These high added-value events are generally carried out in the immediate vicinity of headquarters.

Another important creative action manifests itself in a towing effect on suppliers, who find themselves encouraged – and obliged – to be increasingly competitive to satisfy the needs of the leading company. From that viewpoint, the best R&D policy of any government should be facilitating creation and development of strong, Spanish-capital firms and should strive to attract the main offices of major foreign companies to our country. From this perspective, it is easy to understand the efforts – unfortunately fruitless – that the Spanish government made to ensure the chosen European Iter site was Vandellós.

Having company HQs in the country therefore produces positive external economies that benefit society in the form of enhanced activity. Thus, a large part of the services provided can be attributed to movement closely related to the needs of the industry, such as outsourcing. Many service companies are no more than a product of vertical disintegration of a certain industrial output, and their sole raison d’être is to act as suppliers to that industry. It would be hard for them to develop without it. Were industry to disappear in Spain, how many service companies would have to close?

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